Living with Risk Daily Briefing – April 22

Published on April 22, 2020 / Leer en español

Center for a New Economy

Edited by
Sergio M. Marxuach


Four things you should know today

1) Lawmakers hit the gas on funding deal

Analysis by Rosanna Torres, Director of the CNE office in Washington, D.C.

The Senate convened an afternoon session yesterday ahead of a congressional vote to provide interim funding for several federal programs. According to House Majority Leader Steny Hoyer, the House is expected to vote “as early as Thursday.” The outstanding question is how to relax procedural restrictions and approve a package with most members out of town. Leader Hoyer sent a letter to the Committee on Rules and House administration urging consideration of alternative proxy and virtual voting practices in light of the new social reality. Republicans, on the other hand, are pushing back against abrupt changes to House Rules.

In the bill passed in the Senate, lawmakers have agreed to:

  • $310 billion in funding to replenish the novel Paycheck Protection Program of the Small Business Administration (SBA);
  • $10 billion in additional funding for Emergency Economic Injury Disaster Loan grants;
  • An additional $50 billion in the SBA’s Disaster Loans Program Account;
  • $75 billion for the Department of Health and Human Services Public Health and Social Services Emergency Fund for eligible health care providers; and
  • an additional $25 billion for COVID-19 testing.

Also, the fight for additional funding for Puerto Rico just got a little harder. In a strongly worded letter to Puerto Rico Governor Wanda Vázquez, the Chairman of the Senate Finance Committee, Senator Chuck Grassley, requested information on recent personnel changes and irregularities in contracting practices. In a press release, the Puerto Rico Federal Affairs Administration (PRFAA) lamented the Senator’s decision to voice his concerns publicly, without first communicating his concerns to PRFAA or the office of Puerto Rico’s Resident Commissioner. Under Grassley’s leadership, the Senate Finance Committee is responsible for approving Medicaid funding for the island and has jurisdiction over extending important tax provisions to Puerto Rico, such as the Earned Income Tax Credit and the Supplemental Security Income.

2) Coronavirus update 1: Virus death toll may be underestimated

Lack of state capacity to confront this pandemic should not be confused with the fact that we face a heretofore unknown virus. We are still learning about: the basic science of the SARS-CoV-2 virus; how it is transmitted; how it affects the human the body; and the clinical progression of the disease it causes.

New York Times reporters analyzed mortality data in eleven countries during the past month and concluded that “At least 28,000 more people have died during the coronavirus pandemic over the last month than the official COVID-19 death counts report.” According to the authors, Jin Wu and Allison McCann, “the totals include deaths from COVID-19 as well as those from other causes, likely including people who could not be treated as hospitals became overwhelmed. These numbers undermine the notion that many people who have died from the virus may soon have died anyway.” This goes to show we should be extremely careful about how we interpret and use data about this novel, powerful disease, especially in policymaking circles.

3) Coronavirus update 2: We face an insidious enemy

One of the things that have flummoxed some of the best medical minds that have treated patients with COVID-19 is that the clinical progression of the disease is unlike anything they have ever seen. Dr. Richard Levitan is an emergency room doctor who volunteered to work at Bellevue Hospital in New York City, where he had trained. In an amazing piece of medical journalism for the New York Times, Dr. Levitan, who invented an imaging system for teaching intubation, writes that upon arrival at Bellevue almost all the patients had COVID pneumonia. That was to be expected. What really surprised him was the number of patients with no respiratory difficulties who had COVID pneumonia.

Dr. Levitan writes that “these patients did not report any sensation of breathing problems, even though their chest X-rays showed diffuse pneumonia and their oxygen was below normal.” He and his colleagues developed the hypothesis that COVID pneumonia “initially causes a form of oxygen deprivation we call “silent hypoxia” — “silent” because of its insidious, hard-to-detect nature.”

Furthermore, the vast majority of COVID pneumonia patients he met “had remarkably low oxygen saturations at triage — seemingly incompatible with life — but they were using their cellphones as we put them on monitors. Although breathing fast, they had relatively minimal apparent distress, despite dangerously low oxygen levels and terrible pneumonia on chest X-rays.” As Dr. Levitan openly admits, we really do not know why or how this happens.

There is however one positive thing he found. He suggests that high-risk patients and vulnerable populations, such as nursing home residents, could benefit from screening for low oxygen levels using a cheap device sold at most pharmacies: a pulse oximeter. These devices detect the level of blood oxygen and pulse and could offer an early warning to people who present low oxygen levels but no other symptoms of respiratory distress. If so, there is an opportunity here to avoid painful deaths while we find a vaccine.

4) Excuse me sir: Could you take my 50,000 barrels of oil?

The financial press has reported that settlement prices for futures contracts to deliver oil in May were settled at a price of negative $37.63 per barrel. As reported in Slate, this means “that anybody who is supposed to receive a shipment of American crude but doesn’t want it will have to pay somebody else to take it.”

To understand how this is possible we have to start with the basics. First, there is the oil, the actual, physical, viscous liquid full of hydrocarbons that we extract from the ground. And then there are future contracts, financial instruments to buy that oil at some set price in the future. Those financial contracts can be purchased by companies that may need oil in the future and want to protect themselves, or hedge in financial jargon, against price movements. They can also be purchased by speculators, who are interested in making a profit buying or selling the financial instruments but could care less about the underlying oil.

Now, the way this usually works is relatively uncomplicated. In general, when an oil futures contract expires, traders must decide whether to sell to it to someone else who actually wants the oil; take delivery of the oil themselves at a storage facility; or roll their positions into another futures contract for a later month.

But we are not living in normal times. Four factors converged to produce this economic anomaly:

First, there has been a price war going on for a while between Russia and Saudi Arabia that caused an overproduction of oil prior to the outbreak of the pandemic. The Trump-mediated “deal” to “fix” that situation has not been very effective in getting the parties to cut back production.

Second, the pandemic and the slowdown in economic activity generated by lockdowns and shelter in place orders have cut demand for oil by approximately 30 million barrels per day. But supply has not decreased by 30 million barrels per day; some producers prefer to keep market share, while others for technical and engineering reasons prefer to keep their wells pumping rather than shutting them down. So, on any given day right now there are 30 million barrels of oil sloshing around the world. (By the way, nobody has actually seen a barrel of oil in more than a century. It is just the industry convention to sell it by the barrel. Each “barrel” equals 42 U.S. gallons.)

This leads to the third factor: storage facilities for oil are operating at or near full capacity. According to Bloomberg: “Since the glut began to build and prices began to fall, storage facilities have been moving toward capacity. Crude stockpiles at Cushing in Oklahoma— America’s key storage hub and delivery point of the West Texas Intermediate contract—have jumped 48% to almost 55 million barrels since the end of February.”

Finally, we have the nature or rhythm of the futures market. April 21 was the day for settling oil contracts for delivery in May; this was the day, if you will, when the link between the real physical oil and the financial metaphysical oil futures contract materialized. Given what we explained above, traders could not find counterparties either to buy the oil or the contract from them. And unable to find storage space, they had to decide between paying somebody to take the oil from them or fill their backyard pool with oil. Hence the negative price.

It is hard to make much sense of what is going on, given all the uncertainty. Some analysts claim this is a one-off anomaly due to specific circumstances present at a specific time. Others see some real predictive value in these events. They point out that prices for oil delivery later in the year, while positive, are very low. They see that as an indicator of a strong recession to come. I tend to side with the latter. It is just not normal for a barrel of oil to change hands for -$37, it is not easy to dismiss that as a mere technicality. Time will tell.

Quote of the Day

The only thing that makes life possible is permanent, intolerable uncertainty: not knowing what comes next.

—Ursula Le Guin

Note from the editor

We are reaching an inflection point in this fight against the coronavirus. People are getting antsy. Business owners want to open, people want to go out. We get it. But that does not mean we can be careless or impulsive about reopening the economy. So, I leave you with this warning from fiction, which oftentimes sheds more light, and explains reality better, than any analysis you can find anywhere else.

“He knew what those jubilant crowds did not know but could have learned from books: that the plague bacillus never dies or disappears for good; that it can lie dormant for years and years in furniture and linen-chests; that it bides its time in bedrooms, cellars, trunks, and bookshelves; and that perhaps the day would come when, for the bane and the enlightening of men, it would rouse up its rats again and send them forth to die in a happy city.”

—Albert Camus, The Plague

This is the end of today’s briefing.
Stay safe and well informed!